Radicals use popular discontent to push President Dilma Rousseff into following more statist policies.
Don’t let anyone convince you that civil unrest in Brazil in recent weeks is a spontaneous rebellion against big, corrupt government.
For sure, grievances against government mismanagement and corruption exist. But protesters need organizers, and my reporting suggests that President Dilma Rousseff’s political adversaries on the hard left are hard at work, applying Rahm Emanuel‘s famous dictum: Never let a crisis go to waste.
How Ms. Rousseff responds will determine whether Brazil remains engaged in its decades-long evolution toward democratic capitalism or sinks back into the 1970s. She would be well advised to remember Britain’s Prime Minister Margaret Thatcher, who said that those who stand in the middle of the road get run over.
During the eight years that left-wing Workers’ Party (PT) President Lula da Silva governed Brazil (2002-10), outsiders marveled at the moderation of the Castro-hugging former union leader. Hugo Chávez turned Venezuela into a socialist swamp. But Lula, once an advocate of foreign-debt default and other socialist bromides, respected the power of international capital markets.
He aimed to assure investors that Brazil was open for business. Currency stability, an energy policy that welcomed foreign players, and competitive gains in agriculture gave Brazil the look of a nation awakening from a big-government slumber. Global money managers gave Brazil a thumbs up. With a rising middle class, it became a Wall Street darling.
Lula’s constituency on the hard left was unhappy. It had waited a long time to get its man in power. Bullets during the days of guerrilla warfare hadn’t done it. But ballots had delivered the nation from any semblance of capitalism, or so they thought. Lula’s failure to follow through was seen as a betrayal.
The trouble for the die-hard socialists was that Brazilians were beginning to thrive under Lula’s quasi-market policies. Low inflation and a new welfare program for the very poor eroded the appeal of radicalism. As long as capital flowed into Brazil, the real was strong and the future looked bright. Expectations were rising.
Lula’s government spent lavishly to help his anointed successor to victory, and since taking office Ms. Rousseff has done her own bingeing. She has also committed a series of policy errors that have compounded the fiscal profligacy.
To understand Brazil’s fall from grace, remember that the muscular real, for all its benefits, revealed the competitive weakness of domestic manufacturers. Instead of letting them adapt, the government intervened heavily in the foreign-exchange markets to try to weaken the currency. The government also ramped up protectionism.
John Welch, Latin America strategist for the Canadian Imperial Bank of Commerce, notes that Brazil increased import tariffs last year to 25% on 100 capital goods. “In addition,” Mr. Welch wrote me by email on Saturday, “the government increased to 60% local content rules on concessions in [deep water] oil exploration and production, electricity generation, railroads, and infrastructure projects that involve the government. Adding to this the obsessive policy of weakening the real, it is no surprise that investment collapsed in 2012.”
The economic slowdown is increasing investor wariness about the government’s willingness to regain fiscal discipline. On Friday, Goldman Sachs‘s emerging-markets analyst Alberto Ramos warned in a research note that Brazil’s “fiscal policy is turning increasingly expansionary.”
Mr. Ramos notes that the current 5.8% unemployment is a historical low for Brazil. But GDP growth slowed to 0.9% last year and headline inflation—the broad measure that includes volatile food and energy prices—is now 6.7%. Inflation is running at 8.3% year over year in non-price-controlled goods, and at 9.8% in nontradables such as services.
Brazilians have other gripes. They love soccer, but the opening of some 10 stadiums ahead of next year’s World Cup feels like a slap in the face to many who are unhappy about the deterioration of roads, hospitals and other basic public services. Ms. Rousseff has made some effort to control her party’s notorious corruption but not enough.
So the tinder was dry. But it is worth asking who neatly arranged for the roadblocks and vandalism that broke out across the country after an annual increase in bus fares. There is solid evidence to suggest that it came from disillusioned and radical groups on Ms. Rousseff’s left. Protests in Porto Alegre, for example, began under the leadership of the likes of the Socialist and Freedom Party, which was formed by former PT members expelled for resisting Lula’s pension reform.
Using an anti-status-quo message and social media, organizers have not found it difficult to attract young people of many political persuasions. It is likely that most of them don’t know they are being used.
Ms. Rousseff can solve her problem by opening Brazilian markets and acknowledging that the state is not the engine of growth. Or she can negotiate with the protest organizers and re-establish Brazil as the perpetual country of the future.
MARY ANASTASIA O’GRADY
Write to O’Grady@wsj.com
A version of this article appeared June 24, 2013, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: Behind Brazil’s Civil Unrest.